Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method 2016, D

Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method 2016, Daan Corporation issued $8,200,000 of 6-year, 7% bonds at a market effective interest rate of 5% rece ving cash of S9 041 37. Interest is Daan Corporation wholesales repair products to equipment manufacturers on Apri 1 payable semlannually on April 1 and October 1 a. Journalize the entry to record the Issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank. b. Journallze the entry to record the first Interest payment on October 1, 2016, and amortization of bond premlum for six months, using the stralght-line method. The bond premlum amortization is combined with the semlannual Interest payment. (Round to the nearest dollar.) For a compound transaction, If an amount box does not require an entry, leave it blank c. Why was the company able Issue the bonds for $9,041,137 rather than for the face amount of $8,200,0007 The market rate of Interest Is the contract rate of Interest.

Explanation / Answer

Solution: a. Date DESCRIPTION Debit Credit 1 April 2016 Cash 9,041,137 Bonds Payable 8,200,000 Premium on Bonds Payable 841,137 Notes: [ Premium on Bonds Payable = amount received - par value of bond] =$9,041,137 -8,200,000 =$841,137 b. Date DESCRIPTION Debit Credit 1 October 2016 Interest Expense 216,905 Premium on Bonds Payable 70,095 Cash 287,000 Notes: [ Cash = face value x coupon rate x 6/12 = 8,200,000 x 7% x 6/12 = $287,000] Amortization of Premium on Bonds Payable = premium /(no. of year x 2 ) =$841,137 /(6 x 2) =841,137/12 =$70,094.75 =$70,095 Interest Expense = Cash paid - Amortization of premium on bonds payable =$287,000 -70,095 =$216,905 no. of period = no. of year x no of coupon in a year n= 6 x 2 = 12 c. The market rate of interest is LOWER THAN / LESSER THAN the contract rate of interest Notes: Bond is issued at premium as bonds contract rate or in other word coupon rate is 7% higher than its market interest rate which is 5% Due lower market interest rate , Bond price will be more than its face value, so it is issued at premium Notes: the option for Part is not given by you, it will lower or lesser or similar word check use it correctly . Please feel free to ask if anything about above solution in comment section of the question.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.